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Which tax-free account is best for you? It depends on how much time and money you have.
With housing prices still going through the roof, it’s not easy to save up enough for the down payment on your first house.
To help out, the federal government recently created the Tax-Free First Home Savings Account (FHSA) — a third option for saving up your down payment tax-free, in addition to the already-existing Tax-Free Savings Account (TFSA) and the Home Buyers’ Plan (HPB).
But which one is best? Let’s start by looking at how the new plan works.
Available starting in 2023, the FHSA helps prospective first-time homebuyers save up to $40,000, tax-free. The annual contribution limit is $8,000 per year.
Similar to an RRSP, you can deduct contributions to your FHSA from your taxable income — so you’ll likely get a nice tax refund. Also like an RRSP, your money will compound and grow tax-free. Even better, unlike an RRSP, you don’t have to pay taxes on the money when you take it out.
But there are drawbacks: If you don’t max out your annual $8,000 contribution, you can’t roll over the unused portion to the next year. And there is a lifetime contribution limit of $40,000.
Dan Hallett, vice president of research at HighView Financial Group, says the new plan is a good bet as long as you have at least five years go before buying, and you have the $8,000 a year on hand to contribute.
“If you want to buy a home next year, it will be less helpful,” he says.
With the price of homes today, it is handy to know that the FHSA can be used in combination with a TFSA to help save more, Hallett says. By using both tax-free savings accounts, homebuyers will be able to save much more for a down payment.
An other option is the Home Buyers’ Plan, which allows you to withdraw funds from an RRSP for your first house tax-free, as long as you pay the money back to your RRSP over 15 years. The maximum withdrawal using the Home Buyers’ Plan is $35,000.
So the HBP isn’t as appealing if you have at least five years to save, but it’s a great option if you’re buying a home immediately or in the next year, Hallett says.
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